Currencies sell-off gone too far: Gold rally takes a pause

The U.S. Comex gold futures (COMEX:GCG14) tumbled 1.58% on Thursday to $1,242.20 after jumping 0.91% on Wednesday. For the week, the gold futures are down 1.75%. On Friday morning in Asia, the gold prices rebounded slightly to about $1,244. The S&P 500 Index (CME:SPH14) reversed its losses on Wednesday and jumped 1.13% on Thursday while the Euro Stoxx 50 Index climbed 0.53% on Thursday after declining 0.89% on Wednesday. Both indexes are up week-to-date. The Dollar Index (NYBOT:DXH14) rose three days out of four this week, climbing 0.78% week-to-date and 1.36% year-to-date to 81.085. The 10-year U.S. Treasury note (CBOT:ZNH14) yield fell 2bp this week and 33bp this year to 2.6949% on Thursday.

After the FOMC

While stocks slumped in the days leading to the Wednesday FOMC, better earnings reports and consumer spending data in the U.S. have helped to support the markets on Thursday. The Fed decided to trim $10 billion from the QE program despite the fact that the economic data from the U.S. and Europe continue to be mixed and several emerging markets are battling crises, especially on the political front. While the U.S. grew a respectable 3.2% annualized in Q4, the contraction of the China HSBC/Markit PMI to 49.5 in January indicates that the global economy is still frail. Nevertheless, as the stock prices stabilized and the emerging countries vowed to stem the currency panic, the U.S. Dollar rallied while the gold prices fell.

A Better Alternative Currency

As governments try to boost growth with a weaker currency, low inflation may eventually turn into higher inflation when monetary debasement continues. Paul Singer, Fund Manager from Elliott Management, believes that this is an ideal scenario for gold. When a local currency devalues, gold prices in local currencies typically shoot up as local citizens scramble for an alternative currency to protect their wealth. This is seen in Argentina, Brazil, and Turkey recently.

What to Watch

We will monitor the official January China manufacturing PMI on Feb. 1, the January E18 final manufacturing PMI as well as the January U.S. ISM on Feb. 3, the January services PMI in the E18 and the U.S. on Feb. 5, the U.K. and the ECB monetary policy decisions on Feb. 6 as well as the January U.S. non-farm payrolls and unemployment rate on Feb. 7.